Encyclopedia of Financial Models II

Scope and Methods of Financial Econometrics

SERGIO M. FOCARDI, PhD

Partner, The Intertek Group

FRANK J. FABOZZI, PhD, CFA, CPA

Professor of Finance, EDHEC Business School

Abstract: Financial econometrics is the econometrics of financial markets. It is a quest for models that describe financial time series such as prices, returns, interest rates, financial ratios, defaults, and so on. The economic equivalent of the laws of physics, econometrics represents the quantitative, mathematical laws of economics. The development of a quantitative, mathematical approach to economics started at the end of the 19th century in a period of great enthusiasm for the achievements of science and technology. Robert Engle and Clive Granger, two econometricians who shared the 2003 Nobel Prize in Economics Sciences, have contributed greatly to the field of financial econometrics.

Econometrics is the branch of economics that draws heavily on statistics for testing and analyzing economic relationships. Within econometrics, there are theoretical econometricians who analyze statistical properties of estimators of models. Several recipients of the Nobel Prize in Economic Sciences received the award as a result of their lifetime contribution to this branch of economics. To appreciate the importance of econometrics to the discipline of economics, when the first Nobel Prize in Economic Sciences was awarded in 1969, the co-recipients were two econometricians, Jan Tinbergen and Ragnar Frisch (who is credited ...